Housing affordability - How can we claw our way back?

Posted by Andrew Courtney47sc on February 22, 2018

"It's affordable for now and we don't tend to deal with things until they are well and truly broken,". Economist Shamubeel Eaqub.

This unfortunate truth has loud ringing consequences. Eaqub was here commenting on our superannuation, however the premise is as true for Super as it is for our housing market, the state of our lakes and rivers, our growing income & wealth inequality, and child poverty, mental health et al. Depending on who you talk to, everyone one of the ‘things’ listed above could be considered broken, however none quite so much as our housing market which is so far past the point of needing to be ‘dealt with’ that one gets the impression that maybe it’s just been put in the too hard basket.

In a rich country like New Zealand, having access to a warm, dry, safe house is a human right. Yet, as it stands, we have some 300,000 New Zealanders whom are being denied this right. On the flip side 60% of our population own a house. Most of these folk are doing pretty well, especially when you consider that the average house price rose around $50,000 last year ( that’s more than most kiwis earn). When you look at the two groups (home owners and non-home owners) the disparity in wealth is phenomenal and becoming moreso the more expensive property ownership becomes.

That raises the question of why, if property ownership is so difficult, more and more people don’t just rent and be happy? Why is home ownership such a holy grail for New Zealanders that we will bust our balls to get on the ownership ladder, no matter that it is so much harder? One of the two fundamentals driving a sustained excess demand for housing is a dysfunctional tenancy market. Tenants are able to be kicked from pillar to post by landlords and this imbalance makes renting an unattractive long term proposition for anyone. In Europe it is common for leases to be long (sometimes even life long) so long as the tenant pays the rent & upkeeps the property. Landlords cannot boot people out at will, even if they sell they often have to do so with the tenant still in situ. In other words tenancy agreements are commonly long term contracts and those give tenants security of tenure, and establish security for tenant families.

No such orderly market exists in New Zealand. The rental market plays second fiddle to what is the primary driver of property prices – a sustained excess demand for ownership. A home is not just a home, it is an investment because of the main loophole in our income tax regime, the tax loophole afforded owners. It is to maximize the benefit of this loophole that is the driver for people to invest in homes that are far more elaborate than their accommodation needs. It is a hugely tax efficient way to accumulate wealth, we all know that so we all keep trying to buy the most expensive house we can and of course that act in itself underpins the long term escalation of house prices. Get rid of the tax break and you will get rid of this unproductive investment of capital.

Let me elaborate. Can anybody actually justify the following? Three people save up from their tax paid income $500k. The first buys a bank deposit with the proceeds and pays tax on the annual benefit (the interest earned). The second buys a business and pays tax on the annual benefit (profits). The third buys a house and does not pay any tax on the annual benefit received (the roof over their head). There is nothing equitable about this situation and the impact it has is self explanatory – people invest as much of their savings as they can in their home (and keep doing it by trading up). That activity explains the excess demand for housing and why prices keep escalating over decades compared to income.

There is no justification for this disparity and yet there is no politician who is prepared to address it. Why on earth should we be surprised at the outcome – house price escalation, tenant instability and yawning inequality?

We are continually told that the problem is supply – that we need to build more houses. There is no evidence the drive of the disparity is lack of supply at all yet there is a compelling explanation as to why the disparity is the result of an artificially boosted level of demand – artificial in that it is driven by the tax break described above.

Can anybody show that this is not so?

Of course they can’t – and yet we have politicians and apologists for the gulf between demand and supply, falling over themselves to claim supply shortages are the problem. Shamubeel Eaqub suggests we should build 500,000 more houses. There is no proof that supply shortage is the problem, none whatsoever – yet rather than confront the sacred cow of tax breaks for property ownership, we get these silly suggestions that we need to just keep building and building.

Create an account

Make it law you can only own 1 house… It stops greedy people… Simple philosophy but hard for people to get their head round.
A house is a home not an investment, not a way to get rich not a way to exploit someone who has to be dependent on other to live, and as far as supply and demand goes puts artificial pressure on values.
25 to 35 years to pay for a basic requirement plus years of saving for a deposit. Come on …. That’s just wrong…. And leaves no disposable income for other economic areas… Which is why the hospitality sector suffers,leaving the poor to borrow even more money to live if they want to do anything else other than pay for someone else mortgage.
Maybe QV should devalue the housing market and govt should tax anyone huge amounts for going over the recommendations .
Greed…. It’s not ok !!!!

stewart devitt commented
2018-02-26 12:10:39 +1300

Might be interested in the approach taken by Scotland.

The new Scottish Private Residential Tenancy, (SPRT) came into force on 1st December 2017.

What the changes mean for private lets:

The Private Housing (Tenancies) (Scotland) Act 2016 means a new private residential tenancy will be introduced for new lets in the private sector. The new tenancy will commence on 1 December 2017 and it will:
· be an open-ended tenancy, which means a landlord will no longer be able to ask a tenant to leave simply because the fixed term has ended
· provide more predictable rents and protection for tenants against excessive rent increases
· include the ability to introduce local rent caps for rent pressure areas
· provide comprehensive and robust grounds for repossession that will allow landlords to regain possession in 18 specified circumstances
Once the new tenancy comes into force any existing short assured and assured tenancies will continue in the same way, but new tenancies granted in the private rented sector from December 2017 will be private residential tenancies.

Stewart

Tony Fitzpatrick commented
2018-02-25 22:09:52 +1300

Thanks for your kind words Bob, unfortunately I wouldn’t be seen to have the right “qualifications” to head something like Kiwibuild…lol. As Olliver says it is comforting to know that there are other people out there who think a similar way and know that for NZ to move forward we do it together (the old trade union slogan of “United we stand, Divided we fall” is probably pretty apt now….) not as individuals bickering over whether the policies of the slightly left of centre are better than those of the slightly right of centre or feathering our own pockets at the expense of those who have few options.

Having been out of NZ for just over 5 years I try and keep up with what is going on back home and honestly what I have seen (if the comments section of Stuff are a good guide a middle NZ) really breaks my heart as a kiwi who grew up through the ’70’s, 80’s and ’90’s where people generally cared about each other and were prepared to help those in need. Now it seems everyone has done well for themselves, have comfortable homes and a good financial backing (often due to huge growth in property values of houses they brought when they were affordable) and believe that it is your responsibility to get yourself into a home and if you don’t have a home then you are a lazy, good for nothing, child abusing, drug addict who doesn’t deserve a hand up and by all means do not deserve to live in a neighbourhood by them…. Then have the audacity to blame all the problems on the government. I have long believed that it is unfortunately our generations responsibility (no matter who actually caused the problem) to take one for the team and set things right otherwise we are set to be a society of haves and have nots and all the associated negatives that go with a large proportion of the population living below the breadline.

For now I will continue to enjoy the lifestyle I am afforded in Finland, knowing that I have a great safety net there if anything should go wrong (I had a gallbladder removed recently, only had to wait a few weeks from diagnosis to operation and cost me about $150.), my child will receive free schooling (including books, stationary and a hot meal every day), free tertiary education and my soon to be wife will be paid for 3 years to stay home and look after our daughter, but I will definitely use some of my 56 days of paid paternity leave to visit NZ next Christmas.

I guess all we can do is hope like hell that Kiwibuild is more than a political points scoring policy and an actual mechanism for making housing a right for all New Zealanders.

Oliver Krollmann commented
2018-02-25 13:12:46 +1300

Posts like Tony’s and Bob’s prove to me that there’s hope. We can beat around the bush and blame whoever we want until we’re blue in the face, but in the end it’s we, ourselves and us who got us into this mess, and up to us to get us out of it.
So I won’t play the property game. Ripping off my fellow New Zealanders and sucking money out of the economy to invest it in more land is not going to “deliver for NZ”, to steal a popular slogan. What’s the point of tying up more and more capital in property? I’d rather live in a modern and efficient but modest home and spend a few more dollars in the local economy. Can’t take anything with me to the afterlife anyway.

bob atkinson commented
2018-02-25 10:50:57 +1300

Tony, I was going to make lots of points but will summarise them with “I wish you were in charge of Kiwibuild”. Note actually houses are cheap in NZ – just so long as you don’t live in or near a growing city – so please come back where you are needed.

Only TOP are serious about killing house prices which is a little sad for me since I’m retired and live in a decrepit 1960’s house on a full section in a suburb about 15 min from Auckland’s CBD. Land is worth maybe four times the house. However I can afford my property price dropping by two thirds if it let my children live in better housing – maybe even buy their own.

Tony Fitzpatrick commented
2018-02-25 09:42:43 +1300

Yes Bob, the whole leaky homes saga has been one huge blame shifting debacle with no real winners, unfortunately I too was caught up in one too (fortunately only minor) and saw first hand the process of denial by those who had failed to read plans correctly, knowingly installed a product incorrectly and then those whose job it was to inspect that all work was done correctly claiming they shouldn’t have to climb a ladder to check on something…. (anyway that is another topic…).

To be honest personally I cannot see Kiwibuild solving any problems, only allowing a few more people (probably Labour supporters with not as much capital as their National counterparts) to enter the property speculation market. Their definition of an affordable home being $600,000 in Auckland and $500,000 outside seem ludicrous to me, I would have thought a truer value of affordable would be half of these.

I am sure that a large proportion of these houses are going to be greenfields builds, which if it is the case would be better off as high density developments where you create a community with service businesses, food stores, schools, etc and a central transport hub to connect to the main city areas. Instead of being able to offer 1 family home for every 300 – 400 m2 of land we could be providing 7-12 with the same building footprint assuming only an 8 storey max build height (with a variety of units from 35m2 to 125m2). With land being probably half of the housing cost in many cases this would drop the cost of a new home around 45% for starters…. plus all home owners would have access to a much larger yard than they would have had on their 300-400m2 section anyway without the need to worry about maintaining it, which when you are struggling to pay the monthly installments on your $420,000 mortgage is just another struggle… Add to this the savings from less infrastructure required to service a high density development (maybe 60 – 80% less than a conventional development) then the property component of the cost drops even further. By creating a large compact community with all your essential services within walking or cycling distance then you also reduce the need for a car (which seems to be a necessity in most NZ cities and towns) which then allows your low income earner to really start finding their feet (excuse the pun…). For sure there will be people who want a standalone house with their own yard, etc but the market already has an abundant supply of these.

It will probably be difficult to get over the kiwi obsession of onselling their houses for large profits every few years, but I guess there are government mechanisms that could be introduced to make this less attractive (maybe a large capital gains tax for sales within a specified period of purchase, even 5 – 10 years to encourage kiwis to view their house as a home as in most other parts of the world). Regardless, there should be some sort of constraints on resale of Kiwibuild homes as if these are indeed to get those who need homes into homes then if they turn around and sell them it is a bit disingenuous. This is not a solution that can be solved just by saying we are going to build 100,000 new homes and just go out and start building, unfortunately it needs some planning and a strategy and to be bankrolled and run by the government, maybe the Kiwisaver fund should be invested into development as well in much the same way they brought out Shell as then we are using our super fund to develop essential infrastructure for our country. In Finland these sorts of developments are standard practice, everything is factored in from the start including, public transport options, space for competing supermarket chains, health centres, schools, sports grounds the works. The lifestyle here is far better than anything I have experienced in New Zealand and I have lived in suburban houses in small towns and cities as well as on a lifestyle block. My 100m2 apartment is big by Finnish standards and more than enough for me and my family, I can walk to get groceries, go to doctor and many other services, and within 2 minutes walk am in a wild forest, yet if I were to return to New Zealand I would probably have to go back and live with my parents as I could not afford to get on the property ladder again and would struggle with the going market rents, plus I would need a car to get anywhere (I haven’t owned or needed one since leaving NZ 5 years ago).

For the last 3 weeks I have been staying with my fiance in her apartment in St Petersburg. A basic approximation of the size of her building gives me about 500+ apartments and within a stones throw there are 4 more similar size blocks, giving 2000 homes in the space of a handful of city blocks in NZ. Also in that space is a school and preschool and a lot of parks and play spaces for kids and families as well as wide open spaces between the buildings, we don’t need to go to the sheer scale of the Russian solution but it just gives you an idea of how much better we could do.

bob atkinson commented
2018-02-25 08:31:05 +1300

Tony: Leaky homes certainly did cost stand alone home owners. My point being it made the average Kiwi conservative. If properties had been guaranteed by insurance companies instead of your council (a) the problem would have been identified and fixed far earlier (b) the poor owners would not have involved in endless legal battles with councils using our rates to delay resolution.
However your description of living in Helsinki sounds good – is there a possibility the KiwiBuild will produce communities living in well built inexpensive properties? If not why? Will it be too piecemeal? Or do you think Kiwis will remain too obsessed with selling in the future?

Tony Fitzpatrick commented
2018-02-24 23:44:00 +1300

I understand where you are coming from there Bob, but that is unfortunately that NZ mentality of building as cheaply as possible to make the most profit and screw the buyer. Properly built apartments wouldn’t have the same issue, as for the price, we also seem to aim apartments at the top end of the market (obviously where the best margins are for private developers especially if they can build as cheaply as possible and cut as many corners as possible….) Don’t forget leaky homes also cost many standalone home owners dearly as well…

Tony Fitzpatrick commented
2018-02-24 23:39:26 +1300

thanks Oliver,
congratulations on building the house you wanted rather than one for someone else, I assume that being a house you like and which suits your needs you probably aren’t in a need to sell it like every other property owner in New Zealand anyway, so the “that won’t sell well” comment is probably irrelevant anyway (a point which would probably escape most average kiwis now anyway…)

In fact building on what I said previously, I don’t think the problem of our housing situation in New Zealand comes from any governmental policies per se, but more of a New Zealand mentality that has developed especially in the last 20 years, where houses are seen not as somewhere you settle into, live and raise a family any more but more of a means to make money. I can think of very few clients in my 25 years of designing (sometimes 50+ per year) houses in New Zealand where the ultimate goal was to build a home to live in, it was rather a means of making a quick buck, hence the oversupply of sub-standard housing in New Zealand and shortage of quality houses to solve our problem.

Here in Finland I understand house prices appreciate very slowly and it seems most people spend a long time in the same place, moving more based on needs than making a buck. Even in Russia access to housing seems more accessible for all than in New Zealand. My partner pays the equivalent of about $NZ100 per month for her room (1 of 4) in an apartment in St Petersburg, utilities included and although salaries are a lot less here than in NZ it is nowhere near the proportion of her salary as housing in NZ works out to.

bob atkinson commented
2018-02-24 23:25:21 +1300

Just read new apartments for sale in Long Bay; minimum price $709,000 for 65sm. So even our apartments are way too expensive. I hate commuting from Long Bay to CBD.

bob atkinson commented
2018-02-24 23:14:51 +1300

Tony: good idea. One issue with apartment living in NZ is the leaky home issue. If you buy then the body corp can kill you; at least a stand alone gives you control. Leaky homes led me and many others to only want to buy an old house. Killed innovation.

Oliver Krollmann commented
2018-02-24 22:55:34 +1300

Well said, Tony.
We owned a house in Germany before we moved to NZ. We sold it at a loss, and we were sick and tired of being homeowners and never wanted to own again. So we rented when we came to NZ, for almost six years. But now we’re homeowners again. Why? Because we were sick and tired of being treated as second class citizens by snobby properly management people, and because we’d be stupid and throwing money out the window if we didn’t own.
So we built our dream home – small, compared to the typical McMansion, no carpet, no lawn, just a walk-in shower but no bathtub, no spare rooms or baths, heat pump in the house and solar on the roof.
Almost all of our neighbours who have seen our house hate it. The comment we hear most often? “That won’t sell well!”

Tony Fitzpatrick commented
2018-02-24 22:36:38 +1300

Another reason I believe the housing market is broken is that the supply is the wrong type of house. We seem still obsessed in NZ with the kiwi 1/4 acre dream (or its now downsized equivalent of around 400m2), I am an architectural designer and been out of NZ for the last 5 years exploring life in cities with predominantly high density housing (Moscow, Tokyo, Helsinki and St Petersburg especially). Our NZ obsession has perplexed me for the past 25 years of designing houses in NZ where time and time again I saw young people stretching to build their first home, designed not on their needs but to meet the needs of any potential future buyer (extra bedrooms, bath instead of shower, double garage when they only have 1 car, etc just in case a future buyer needs them) ultimately stretching themselves financially to the maximum and with the expectation that they will be moving on. This mentality has created a whole stock of unsuitable houses in New Zealand that are designed to be no more than tradeable commodities to make a profit on each time. An additional factor to this is that to sustain demand in this sort of market we need to keep expanding the boundaries of our towns and cities with all of its associated infrastructural costs which then have to be recovered by way of rates (which most homeowners constantly whinge about the cost of…)
I believe that it is time the state stepped in and developed some higher density solutions (these do not have to be the ugly dysfunctional boxes often associated with high density state housing of the past) which would enable both those who cannot get on the housing ladder to access affordable housing and those who wanted to rent to have an affordable solution. A proportion of this stock could be sold on the open market and the remainder sold to the Kiwisaver Fund to use as rental accommodation. Where I currently live in Helsinki, a lot of the rental housing is owned by municipalities and pension funds, I am currently renting a large 100 m2 apartment from a pension fund and know that my tenancy is safe as long as I pay the rent and look after the place until I choose to move (or die…), I have no garden or ongoing maintenance to worry about and can get on and enjoy my life without stress.
I would have thought that for many of the 300,000 homeless in New Zealand, that just a nice warm, dry and comfortable house that fits their needs is more important to them than the back yard they would need to maintain or the extra spaces they have no need for as in most NZ properties or the exterior maintenance they would need to do over time. There is nothing more comforting to know that you have a home that has all those factors and you will not have to worry about the unexpected costs that often go with owning a standalone house.
I realise many in NZ would turn up their noses at the thought of living in an apartment, but around me there is more nature, open space and community spaces than you ever get in our sprawling New Zealand suburbs. As a reference the island I live on has a size of 2.5 km2, housing a population of about 25,000, has all the schools, essential shopping, public transport and health services included as well as numerous parks in addition to the wide open spaces around our buildings, compared to my home town of Blenheim with a similar population spread of 14 km2, which doesn’t even have an adequate public transport network (which is also an essential component of any solution to our housing problems). This sort of density is similar to all small towns throughout Finland (plus Scandinavia and Russia as well).
So basically until we have the right sort of homes available we will not solve the problem and building a lot more typical NZ homes is not the solution it will only exacerbate the problem….

bob atkinson commented
2018-02-24 18:19:51 +1300

1. The first buys a bank deposit with the proceeds and pays tax on the annual benefit (the interest earned).
2. The second buys a business and pays tax on the annual benefit (profits).
3. The third buys a house and does not pay any tax on the annual benefit received (the roof over their head).
4. The fourth buys lots of beer and drinks it. However paid 15% GST on the beer.
Solution make the house buyer pay GST.

Oliver Krollmann commented
2018-02-24 16:15:27 +1300

Bob, the key to success is to keep it simple, so that you don’t need an accountant if you’re just one of those owner occupiers who worked their butt off to live in a paid home (the most common argument which we get to hear all the time). That’s why TOP’s approach to tax the equity (value minus debt) at a minimum return rate is so elegant. You only pay for the part of the asset that you actually own, and any capital gains will automatically be taxed along the way as your equity grows, not in a big lump when you decide to sell it. Think of RWT – you earn interest, tax is deducted, done. Same with PAYE – you earn wages, tax and levies are deducted, done. The asset tax is even easier because it’s based on a single tax rate. It can be quite hard to figure out your correct RWT or PIR, due to the tax bands and multiple incomes. We have to make this dead simple, a solution that is fair and works for 90% to 95% of John Doe home owners. The few exceptions can be sorted out in a separate process.
I’d also be open to tax luxury cars the same way. All we’d need is a tick box in NZTA’s motor vehicle register that it’s a luxury car, which should be based on the needs of the car owner and the specs of the car. Say you drive a used Nissan Leaf to work, that’s fine, no asset tax required. Say you went for the Tesla Model S, you probably have the means to pay tax for that “income” the luxury car provides to you (note how I’m deliberately avoiding to mention any fossil-fuel car models here ;-).

Bob Dom commented
2018-02-24 15:03:45 +1300

Luke and Oliver. Points taken.
Further exploration is worthwhile.

With the current “housing crisis”, it’s reported that many are shut out of the “housing ladder” (aka “property ladder”).
To see these reports, google these terms and select Tools, Country: New Zealand.
So getting on the property ladder is still the common goal for New Zealanders. It’s not just getting on to the first rung
of the ladder. Consider a young family getting on the first rung with a 100sqm property. With a growing family,
they may want to climb a couple of rungs up to a 140 sqm property (with outside parking).
It could be a mission to define how a family should climb the property ladder responsibly and it’s not clear that many families
will do this because it’s a tax loophole. Those on high incomes may want to tack on a family/media room for their own enjoyment and lifestyle – not to avoid tax. But ok, you’re saying that their effective rent should increase to perhaps discourage them from such “investment”. Another question : can we apply the same approach with the cars we buy?

With the argument to invest in enterprises and business, this may need a separate thread from TOP. People may need to know how to invest confidently with arguably less risk than property. There is an irony that investing in shares/businesses can be seen as true speculation whereas the Labour Party is against property “speculators” – many of whom are long term investors and responsible landlords providing a service. But you see the point – rather than argue against the property ladder, why not convince people how they can invest in businesses and enterprises?

With owner-occupiers paying rent and claiming their expenses, I’m open to that idea. Just as I’m open to paying tax on the capital gain with the comprehensive CGT that TOP propose. My feeling is that all owner-occupiers will need an accountant and/or know how to keep the books. If an owner-occupier sells after 10 years for $500,000 more than they paid for it, they may wish some relief against (say) $100,000 of capital improvements and (say) $51,500 of repairs and maintenance. Also, to ensure a level playing field which Labour wants between investors and owner-occupiers, will the latter be forced to
meet their responsibilities under the Healthy Homes Guarantee Act and (future) compulsory Rental Warrant of Fitness? If it’s important, it should be important to all. There are also (for example) owner-occupier properties that have been left unmaintained for years/decades (we can see this when they come on the market) so it’s not clear how the level playing field will apply here – but clearly these owner-occupiers have struggled.

Just some thoughts – but I do have those concerns.

Oliver Krollmann commented
2018-02-24 12:43:09 +1300

In my opinion the easiest way to make it even clearer would be to picture owner-occupation as having to rent from oneself, meaning instead of just living in your own home for free you would have to be your own landlord and tenant, paying rent to yourself out of net income but then having to pay tax on the rental gross income. That makes the tax loophole appear right away.

Luke M commented
2018-02-24 12:25:54 +1300

I definitely hear where you are coming from Bob Dom, with regards to the analogy.

From where I’m sat the stated analogy is taking a bit of wind out of the sails of a very valid point.

From where I’m sat I’d offer up this alternative. The underlying issue with the tax loophole is that it encourages kiwis to commit ALL their capital and investing power into the housing market.

Analogy: I have $500k today and do not own my main family home (but could buy one for $200k). I’m looking for the greatest financial return. Logic dictates that the best course of action (due to the tax loophole) is to buy a $500k house, whether I need it or not, and not put any money into other investment types.

It’s this driver that causes market speculation and overheating.

The damage is two fold:
Housing affordability plummets, but also a lack capital for enterprises/businesses that actually would see real increases in NZ productivity and real terms GDP per capita growth.

Bob Dom commented
2018-02-23 16:32:52 +1300

The argument about 3 people spending the $500k saved seems to be rather incomplete. It seems to suggest that the two who invest in a bank deposit and a business are probably renting a home hence they have decided to not buy a home. So somebody still has to buy a home in these cases. Everyone needs a home whether they invest in a business/deposit or not. This distinction is lost in the TOP argument.

Oliver Krollmann followed this page
2018-02-23 15:26:36 +1300

Peter Sumpter commented
2018-02-22 19:02:35 +1300

Simple fact. When the state provided housing for low income families and used family benefit to help with a deposit for first home buyers, housing was affordable and stood at 78% (70s and 80s)
National stopped building state houses (cut supply) and subsidised private landlords with the accommodation supplement (fueled demand). As a result cheap homes were snapped up by investors, prices have gone ballistic, and home ownership is now below 50%. As the philosopher Lisa Simpson would say, “We’ll, duh!”
The answer is obvious – Go back to a system that worked.

Peter Mullen commented
2018-02-22 17:19:51 +1300

This is a truth that homeowners do not want to face….as long as I am alright Jack.